Tax trends from the recession: the Great Recession and slow recovery forced states to adjust their tax policies to survive the budget shortfalls.

• Author: Rafool, Mandy
• Position: TAX POLICY

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For state budgets, the fiscal challenges of the Great Recession have been enormous and widespread. And their effects linger today.

Although revenues began to dry up in 2008, the severe drought began in 2009 and continued into 2010. No matter how pessimistic forecasts were, actual revenue collections were even worse, over and over and over again. Lawmakers scrambled to address not only lower revenue growth rates, but also year-over-year declines in actual collections. The picture improved slightly in 2011 and 2012 as states reported slow but steady revenue grow.

Now, in most states, revenue growth has finally returned to the peak levels of 2008, eliciting a different emphasis in tax policy debates. With all the tax talk swirling around state capitols, it's worth taking a look back at five tax trends that emerged from the economic downturn as lawmakers struggled to fill severe budget shortfalls. Many continue to have an impact today.

1. Targeting High-Income Earners

   New Jersey lawmakers authorized the first "millionaire tax" back in 2004. But it wasn't until the Great Recession that the trend toward targeting higher incomes began in earnest.

   Maryland, followed by California, kicked off the wave of income tax hikes on high earners in 2008. On incomes greater than $1 million, Maryland increased the tax rate and California applied a new surcharge. In 2009, nine more states (Connecticut, Delaware, Hawaii, Maine, New Jersey, New York, North Carolina, Oregon and Wisconsin) raised personal income tax rates on high earners, often for a limited time.

   But a high-income resident in one state wasn't necessarily considered so in another. The definition of "high income" varied greatly. In Delaware, for example, tax rates were raised on anyone earning more than $60,000. For joint fliers, the high-income range varied from $100,000 in North Carolina to $1 million in Connecticut. In Hawaii, lawmakers added a top tax bracket for incomes greater than $200,000 ($400,000 joint), and increased its rate, along with two other brackets.

   The New York Legislature created two new temporary tax brackets on high-income earners and limited itemized deductions for taxpayers making more than $1 million. In 2012, the state targeted taxpayers earning more than $10 million by further limiting the itemized deductions for charitable donations they can claim.

   In 2012, Maryland again raised tax rates on high-income residents in addition to reducing personal...